School districts face choice between funding programs for students or pensions for retirees

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Carl Petersen, who still three children in LAUSD, speaks to LAUSD board before they chose Monica Garcia to replace Ref Rodriguez as president on Tuesday, Sept. 26, 2017. Ref Rodriguez gave up that position last week after conspiracy charges were filed against him related to financing for his 2015 campaign for school board seat. (Photo by Sarah Reingewirtz, Pasadena Star-News/SCNG)

A new report on the Los Angeles Unified School District’s retirement costs shows the district has nearly $15 billion in unfunded health care costs for current employees and retirees. The district’s so-called OPEB liability — that’s actuarial jargon for “other post-employment benefits,” which includes the cost of medical, dental, and other health care benefits that fall outside the traditional pension system — climbed from $13.5 billion in 2015 to $14.9 billion in 2017, according to the report.

The increase in the district’s unfunded liability is driven by an adjustment in accounting standards that prohibits school districts and other public employers from using artificially high estimates for future investment returns, a strategy that in the past has allowed governments to hide some of their retirement liabilities. Under the new rules, future investment returns will be estimated at 3.6 percent, rather than the previous rate of 4.7 percent.

This change in accounting standards is expected to affect pension systems from coast to coast, leaving a more realistic (but also more expensive) picture of what taxpayers and governments will owe to current public employees when they retire. The change will also require public entities to show their OPEB liabilities on official balance sheets, something that few governments previously did.

In other words, LAUSD is running out of ways to hide its public employee debt — and is running out of money to pay for it.

Because school districts in California receive state aid based on the number of students enrolled in district schools, LAUSD’s declining enrollment means there is less state funding to cover those future costs. The district has done a poor job of setting aside funds. It has only $244 million in assets to cover more than $15.2 billion in liabilities, the report shows — and a pay-as-you-go strategy works only as long as future cash flows can keep up. Public employees will continue to accrue benefits until they die, but declining enrollment exposes the district’s fiscal problem.

While there are a variety of rules governing when school district employees can retire, most are eligible for retirement when their years of service and age add up to 80. In other words, a 55-year-old with 25 years of employment could retire with full benefits. The report shows that the most common ages for LAUSD employees to retire are between 59 and 61.

As Marc Joffe, a senior policy analyst at Reason Foundation, wrote last year in the Orange County Register, LAUSD’s OPEB costs per student are much higher than several other large California school districts. For the 2016 school year, LAUSD paid $525 per student for OPEBs compared to $81 at Irvine Unified, $29 at San Diego Unified, and $0 at Oakland Unified, which does not subsidize retiree health insurance coverage at all. Unlike most other districts, LAUSD provides the same health coverage for employees and retirees, with neither group paying premiums for their insurance. By contrast, retirees in Oakland pay their full health insurance premiums.

If LAUSD required employees and retirees to cover just 10 percent of the health insurance premiums, the district could save $54 million annually, according to a 2015 report from the district’s Independent Financial Review Panel.

Every dollar counts for the district, which is facing an estimated $400 billion deficit by the 2019-20 school year. The reckoning is coming. According to a Stanford University study, LAUSD will have to cut other spending by about 3 percent over the next decade to afford the costs of retirees’ pensions and health benefits. Joe Nation, a former Democratic state lawmaker and author of the report, says pension costs at LAUSD (and in cities and school districts across the state) will “crowd out” essential school services like paying teachers and librarians.

It seems LAUSD has a choice — Ask employees and retirees to pay for a portion of their own health insurance costs, something that nearly all other workers, public and private do, or admit that the school district’s obligation to retired workers supersedes its obligation to school-age children.

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